Two years ago the Michigan Court of Appeals issued an important decision permitting developers, builders and purchasers of newly constructed buildings and homes to pay less in real estate transfer taxes. The Michigan Supreme Court recently reversed that decision. Lake Forest Partners 2, Inc. v Department of Treasury (February 1, 2008)
           
Consider the following scenario: Do-good developer records a Master Deed and creates 40 business site condominium units. Do-good enters into purchase agreements with prospective business purchasers. Each purchase agreement provides for both the sale of an unimproved unit and construction of a new building on the unit. The purchase agreement sets forth a separate purchase price for (a) the cost of the unimproved land (the unit) and (b) the cost of the building (which is much more than the cost of the unit). When the transaction closes, Do-good delivers a warranty deed. The question becomes: what is the value of the “property” (is it the unit or the unit and new building?) for purposes of determining the amount of the State real estate transfer tax?

In 2006, the Michigan Court of Appeals held that the value of the “property” is set at the time the parties sign the purchase agreement, not at the time of closing. The parties signed the purchase agreement before Do-good built the building. Therefore, the Michigan State real estate transfer tax applied to the value of the unit (the raw land) but not the value of the unit improved with a building. According to the Court of Appeals, the value upon which the tax is imposed, means the fair market value of the property “at the time of the transfer.” The Court determined that transfer occurs not upon delivery of the deed, but, upon execution of the purchase agreement.

The Michigan Supreme Court disagreed. The Supremes concluded that Do-good should have paid the State real estate transfer tax based upon the value of the unit improved with a structure. The transfer tax taxes recorded instruments. The only recorded instrument was the deed. Therefore, the “value” exchanged for that deed included both the cost of the unit and the new structure.

While this case is bad news for people who want to pay less in transfer taxes, it did not close the door completely with respect to planning opportunities. For example, it might still be possible to structure and document a new construction transaction in such a way that the parties can legally pay a State real estate transfer tax on the value of the land alone, but not the value of the new home or building.

For further information, contact Gregg A. Nathanson, Esq., an attorney at the law firm of Couzens, Lansky in Farmington Hills, Michigan, at 248-489-8600 or gregg.nathanson@couzens.com

The information contained herein does not attempt to give specific legal advice. For advice in particular situations, the services of a competent real estate attorney should be obtained. These materials are the exclusive property of Gregg A. Nathanson, Esq., and no reprint or other use of the information contained herein is permitted without Mr. Nathanson's express prior written authorization.
Appeared in Commercial Board of Realtors Newsletter, December 2005. Reprinted with permission.

©2008 Gregg A. Nathanson, Esq. All rights reserved